by Adam Shell and Kim Hjelmgaard, USA TODAY

by Adam Shell and Kim Hjelmgaard, USA TODAY

NEW YORK -- U.S. stocks soared to new highs Wednesday even though the Federal Reserve announced that it would begin gradually dialing back on its market-friendly bond-buying program in January, a decision that marks the start of a long-awaited shift back to more normalized monetary policy.

The Dow Jones industrial average surged almost 300 points to a record close after the Fed decision, as markets were soothed by the Fed's dovish comments overall, which suggests a still-easy Fed going forward.

The Dow rose 292.71 points, or 1.8%, to 16,167.97. It blew past its previous closing high of 16,097.33, set Nov. 27.

The Standard & Poor's 500 index jumped 29.65 points, or 1.7%, to a record close of 1,810.65, beating its previous closing high of 1,807.23 on Dec. 9. The Nasdaq composite index added 46.38 points, or 1.2%, to a fresh 13-year high of 4,070.06.

The Fed said it would reduce its current $85 billion in monthly purchases of Treasury bonds and mortgage-backed bonds slowly, trimming its purchases by a total of $10 billion per month. They said they would trim purchases of both Treasuries and mortgaged-back bonds by $5 billion per month.

More important, the Fed said it would keep short-rates low "well after" the unemployment rate, now 7%, hit 6.5%, which was a change in guidance that points to longer policy accommodation from the Fed.

The Fed's move was dubbed "Taper Lite," by Thomas Tzitzouris, an analyst at Strategas Research Partners.

There was some logic to why stocks rose, despite the Fed's first baby steps toward reducing stimulus, says David Kotok, chief investment officer at Cumberland Advisors.

"The taper announcement lowers uncertainty," says Kotok. "We now know they will be gradual. They will not shock the economy. They will be slow to tighten, as tightening is two years or more away. They see inflation as too low. Lots of air got cleared now that they have announced it."

In a statement explaining its decision, the Fed said it "sees improvement in economic activity and labor market conditions" that are consistent with growing underlying strength in the broader economy." It also said it would continue to monitor incoming economic data and continue its asset purchases in "until the outlook for the labor market has improved substantially."

The Fed also stressed that it would continue to reduce, or taper, asset purchases in "measured steps" if the job market continues to heal and inflation starts to move closer to 2%. Tapering, the Fed stressed, is not on a "preset course."

In explaining the market's positive response to what was viewed as a market negative, Paul Hickey, co-founder of Bespoke Investment Group said: "The market has been cognizant of the fact that this was going to happen at some point in the near future, so now that it has happened it is one less thing to worry about. Additionally, the rest of the statement was dovish as they said that the current rate environment would remain in place even after the unemployment rate dropped below 6.5%."

The yield on the 10-year Treasury note rose to 2.88% from 2.83% on Tuesday.

In the prior session, the Dow declined 0.1% to 15,875.26. The Nasdaq composite edged lower 0.1% to 4,023. 68. The S&P 500 dipped 0.3% to 1,781.

In energy markets, benchmark crude for January delivery gained 23 cents to $97.44 a barrel in electronic trading on the New York Mercantile Exchange. The contract dropped 26 cents, or 0.3% to $97.22 a barrel on Tuesday.